Contingent Contracts

What "collateral" means

Compare two promises:

• "I will pay you Rs 10,000 if your house burns." The burning of the house is nothing to do with the parties' performance; it is an external event. Collateral, so contingent.
• "I will pay you Rs 10,000 if you deliver 100 bags of cement." The delivery is the other party's own promise. It is not collateral; it is the reciprocal promise. This is a reciprocal promise under section 2(f), not a contingency, and it is governed by sections 51 to 54, taken up in [Performance of Reciprocal Promises].

Every year students call a reciprocal promise a contingent contract. The test is simple: ask whether the event is something one of the parties has promised to do. If it is, it is a reciprocal promise. If it is an outside event, the contract is contingent.

The rules, section by section

Section 32: contingent on an event happening

"Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void."

The Act's own illustrations:

• A contracts with B to buy B's horse if A survives C. Not enforceable unless and until C dies in A's lifetime.
• A contracts to sell a horse to B if C, to whom it was offered, refuses to buy. Not enforceable unless and until C refuses.
• A contracts to pay B when B marries C. C dies unmarried to B. The contract becomes void.

Section 33: contingent on an event not happening

"Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible, and not before."

Illustration: A agrees to pay B a sum if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks, because the return has then become impossible.

Section 34: the event is the future conduct of a living person

"If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies."

Illustration: A agrees to pay B if B marries C. C marries D. The marriage of B to C is now considered impossible, although it is possible that D may die and C may afterwards marry B. The Act refuses to keep a contract alive on that kind of remote possibility.

Section 35: where a time is fixed

Two limbs, one for each direction.

Contingent on an event happening within a fixed time: the contract becomes void if, at the expiration of the time, the event has not happened, or if before that time the event becomes impossible.

Contingent on an event not happening within a fixed time: the contract may be enforced when the time has expired and the event has not happened, or, before the time expires, if it becomes certain that the event will not happen.

Illustration: A promises to pay B if a certain ship returns within a year. Enforceable if it returns within the year; void if the ship is burnt within the year.

Section 36: contingent on an impossible event

"Agreement contingent on impossible events void."

An agreement to do or not to do something if an impossible event happens is void, whether or not the impossibility of the event is known to the parties at the time the agreement is made.

Note the drafting. Sections 32 to 35 speak of contracts which are enforceable or become void; section 36 speaks of an agreement which is void. That is deliberate. Where the event was impossible from the start, there never was a contract at all, and section 2(g)'s vocabulary applies.

Contingent contract against wagering agreement

This distinction is set almost every year, because both involve an uncertain event.

The dividing line is interest. Insurance is a contingent contract because the insured has an interest in the property independent of the policy. If he had no such interest, the same document would be a wager.

A worked example

Rajan agrees to buy Sushma's plot for sixty lakh rupees "if the municipal corporation sanctions the layout within twelve months".

• Is this a contingent contract? Yes. There is a contract to do something, buying; it depends on an event, the sanction; the event is uncertain; and it is collateral, because sanction is neither party's own promise.
• Can Rajan sue for conveyance in month three, before sanction? No. Section 32: a contract contingent on an event happening cannot be enforced unless and until the event has happened.
• The corporation refuses sanction in month five. The event has become impossible, so under section 32 the contract becomes void, and under section 35's first limb the same result follows because the time was fixed.
• Twelve months pass with no decision. Section 35, first limb: the contract becomes void at the expiry of the fixed time, because the event has not happened.

Now change one word. The agreement reads "if Sushma obtains the sanction within twelve months". Obtaining the sanction is now Sushma's own promise, so it is not collateral. This is a reciprocal promise, not a contingency, and Sushma's failure is a breach, for which Rajan may claim damages under section 73. The change in one word changes the remedy completely, which is why the collateral requirement is worth learning properly.

What it does NOT mean

"A contingent contract is not yet a contract." It is a contract from the moment it is made. Only performance is suspended.

"Any contract with a condition is contingent." Only where the event is collateral. If the condition is a party's own promise, the contract is absolute with reciprocal promises.

"A contingent contract is a wager." A wager is void under section 30. A contingent contract is valid, and the difference is that the parties have an interest in the event independent of the bargain.

"Under section 34 the contract survives while any theoretical possibility remains." It does not. The Act's own illustration says the marriage is impossible once C marries D, even though D might die and C might then marry B.

Quick revision

• Section 31: a contract to do or not do something if some event, collateral to such contract, does or does not happen.
• Essentials: a valid contract; an uncertain future event; the event collateral, not a party's own promise.
• s.32: contingent on happening: not enforceable until it happens; void if it becomes impossible.
• s.33: contingent on not happening: enforceable when the happening becomes impossible.
• s.34: future conduct of a living person: impossible once he does something making it impossible that he should so act.
• s.35: within a fixed time: happening form becomes void at expiry or on impossibility; not-happening form becomes enforceable at expiry or when the event becomes certain not to happen.
• s.36: contingent on an impossible event: void, whether or not the parties knew.
• Contingent contract against wager: the test is an independent interest in the event.

Test yourself

1. Define a contingent contract and identify the essential most often missed. Section 31: a contract to do or not to do something if some event, collateral to such contract, does or does not happen. The most often missed essential is that the event must be collateral, that is, not the promise of either party.

2. A agrees to pay B if a ship returns within a year, and the ship is burnt in month eight. What follows? The contract becomes void, under section 32 because the event has become impossible, and under the first limb of section 35 because the event cannot now happen within the fixed time.

3. Distinguish a contingent contract from a wagering agreement. A contingent contract is valid and the parties have an interest in the event independent of the contract; a wagering agreement is void under section 30, neither party has any interest beyond the stake, and one party's gain is exactly the other's loss.

4. A promises to pay B if B marries C, and C marries D. Is the contract still alive? No. Under section 34 the event is deemed impossible once C marries D, notwithstanding the theoretical possibility that D may die and C may afterwards marry B.

5. What is the effect of section 36, and how is its language different? An agreement contingent on an impossible event is void, whether or not the parties knew of the impossibility. Its language speaks of an agreement which is void, rather than a contract which becomes void, because there never was a contract at all.